Electric Vehicle Trends And Automation Will Shape Long-Term Industry Success

Key Takeaways

• Aggressive restructuring and disciplined portfolio management could significantly boost profitability and sustained earnings growth ahead of market expectations.
  
• Strategic moves in AI cooling, electrification, and global localization uniquely position Nidec for strong, long-term top-line expansion and competitive advantage.
  
• Rising regulation, cost pressures, slow restructuring, integration issues, and weak diversification threaten future revenue, margins, and returns, while technological disruption adds further risk.

Catalysts

Develops, manufactures, and sells motors, electronics and optical components, and other related products in Japan and internationally.

• While analyst consensus expects margin enhancement from structural reform and cost cuts, the scale and speed could be underestimated-clear plans to eliminate ¥100 billion in variable costs and ¥50 billion in fixed costs, combined with ruthless portfolio exits, may drive a step-function increase in net margin and profitability far earlier than anticipated.
  
• Analysts broadly agree that restructuring is positive, but they may be overlooking the sheer magnitude of profit uplift as Nidec rapidly pivots out of low-return businesses and ramps up higher-margin segments, especially given management's willingness to enforce a strict 10% OP threshold across all divisions-this disciplined approach can trigger material, sustained earnings growth and returns on capital.
  
• Nidec is rapidly establishing dominance in AI server cooling and data center infrastructure-a market seeing explosive global demand-by leveraging its proprietary In-Row type water cooling modules and expanding global footprint, setting the stage for multi-year double-digit revenue growth as data center buildout accelerates.
  
• The accelerating electrification in automotive and industrial markets, combined with Nidec's aggressive investments and recent manufacturing site consolidations, uniquely position the company to capture disproportionate share from surging demand for high-efficiency motors and drive systems, creating a robust long-term top-line expansion.
  
• Nidec's global manufacturing and legal restructuring is removing trade and compliance bottlenecks, allowing it to localize production, deepen key relationships with blue-chip OEMs, and outmaneuver global competitors, all of which can drive higher sales reliability, premium pricing power, and ultimately superior free cash flow conversion.

Nidec Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Nidec compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Nidec's revenue will grow by 5.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 6.1% today to 9.4% in 3 years time.
• The bullish analysts expect earnings to reach ¥282.6 billion (and earnings per share of ¥246.34) by about August 2028, up from ¥157.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 23.1x on those 2028 earnings, up from 21.0x today. This future PE is greater than the current PE for the JP Electrical industry at 12.5x.
• Analysts expect the number of shares outstanding to decline by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Nidec Future Earnings Per Share Growth

Risks

• Nidec faces headwinds from global resource efficiency movements and rising right to repair regulations, which are likely to decrease replacement and new small motor sales, placing long-term negative pressure on revenue growth.
  
• Persistent inflation and rising input costs threaten to erode profit margins, especially since recent results show only a slight increase in operating profit despite significant cost-cutting and business restructuring efforts, raising concerns over Nidec's ability to sustain net margins.
  
• The company's repeated acquisition and integration challenges, such as those related to NPe and FIR, alongside ongoing investigations into trade compliance and possible further legal or goodwill write-downs, create a risk of future earnings volatility and lower return on equity.
  
• Continued dependence on commoditized product segments and slow-moving, cost-heavy restructurings in Europe and the Americas expose the company to declining average selling prices and could keep gross margins under sustained pressure.
  
• The threat of technological disruption in the electric motor industry, compounded by slow diversification away from legacy businesses and heavy capital expenditure in new domains, presents a risk that investments will not translate into expected revenue, straining free cash flow and profitability.

Valuation

• The assumed bullish price target for Nidec is ¥4636.07, which represents two standard deviations above the consensus price target of ¥3569.41. This valuation is based on what can be assumed as the expectations of Nidec's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥4800.0, and the most bearish reporting a price target of just ¥2600.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ¥3019.4 billion, earnings will come to ¥282.6 billion, and it would be trading on a PE ratio of 23.1x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of ¥2882.0, the bullish analyst price target of ¥4636.07 is 37.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.